Economic growth not expected to reach past cycles

An earlier version misstated the name of the National Association of Business Economics

Economic growth has been falling short of prior cycles.

The U.S. is primed to grow in 2016 at the fastest pace since the end of the Great Recession. But even if it does, the economy is likely to fall well short of what Americans used to expect.

Most major forecasts call for the U.S. to grow 2.6% in 2016. After more than six years of recovery, the thinking goes, the economy is the healthiest it’s been in years. Hiring is way up, unemployment is way down, the housing market is back on track and consumers are the most optimistic since 2007.

If those forecasts are spot on, the economy would turn in its best performance in 10 years. The U.S. grew 2.7% in 2006, the year before the recession started.

Leaders from business, academia and the economic-consulting industry are largely in agreement.

The well-known Blue Chip survey sees growth this year a touch slower at 2.5% and the U.S. Federal Reserve — after years of excessively rosy forecasts — predicts the economy will grow a more modest 2.3% to 2.5%.

Not bad. Not bad at all. But not even close to what used to be the norm.

From the end of World War II in 1945 until 2007, the U.S. grew an average of 3.2% a year. And many baby boomers well remember the 10-year expansion from 1991 to 2001 during which the economy averaged a heady 3.6% annual growth rate.

How fast an economy expands in the long run is a function of two simple things: population growth and productivity. Add up how much each one increases per year and that gives a good idea of the U.S. economy’s growth potential.

You’d have to look under every rock to try to find any expert who thinks the U.S. will return to those kind of growth rates anytime soon. The Fed, for example, sees the economy plodding along at a 1.8% to 2.2% clip in the “long run.”

The Congressional Budget Office, meanwhile, says that through 2025, the economy will be hard pressed to achieve a top speed that surpasses 2.2% for very long.

The slower trajectory of the U.S. economy can be traced to many causes, but the biggest are poor productivity gains and a falling percentage of Americans who are in the workforce. Few economic observers expect big improvements in either category soon.

“We are still in a 2% world,” said David Donabedian, chief investment officer of Atlantic Trust Private Wealth Management.

That number matters. Slower growth means fewer people working as a percentage of the population. It means skimpier increases in wages and salaries. It means lower business profits. It means fewer new businesses created and less innovation. Those are just some of the pitfalls.

Even worse, forecasters have been consistently wrong since the U.S. exited recession in mid-2009. They’s repeatedly predicted faster growth, only to see those forecasts dashed.

Take 2015. Before the year started the Philly Fed’s survey of professional forecasters predicted 3% growth. Now it looks like the economy will grow closer to 2%. The first reading on GDP for the fourth quarter and all of 2015 will be released on Jan. 29.

Each year the shortfall has been linked to seemingly surprising events.

The value of the dollar, for instance, soared to multiyear highs in 2015 and crushed U.S. exports. Nor did anyone foresee such a huge drop in oil prices actually hurting the economy in the short run because of the heavy damage caused to a vibrant U.S. energy industry.

“If you had told me at the end of 2014 that oil would end at less than $35 a barrel ... that’s the biggest surprise,” said Gus Faucher, senior economist at PNC Financial Services.

What could happen this year? The recent turmoil in China, the world’s second-largest economy, could spread to the rest of the global economy. But who knows? Each year it’s been a new surprise.

“It’s never what you are looking for,” said Steve Blitz, chief economist at ITG Investment Research. “It always sneaks up on you.”

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